Time-Varying Variance Risk Premium and the Predictability of Chinese Stock Market Return. Issue 8 (3rd August 2017)

• Record Type: Journal Article
• Authors: Chen, Jian; He, Chen; Zhang, Jing
• Is Part Of: Emerging markets finance & trade. Volume 53:Issue 8(2017)
• Page Start: 1734
• Page End: 1748
• Publication Date: 2017-08-03
• Subjects: Chinese stock market -- general equilibrium model -- out-of-sample predictability -- recursive utility -- variance risk premium; G11 -- G12 -- G13; Balkan Peninsula -- Commerce -- Periodicals; Balkan Peninsula -- Foreign economic relations -- Periodicals; Europe, Central -- Commerce -- Periodicals; Europe, Central -- Foreign economic relations -- Periodicals; Europe, Eastern -- Commerce -- Periodicals; Europe, Eastern -- Foreign economic relations -- Periodicals; Turkey -- Commerce -- Periodicals; Turkey -- Foreign economic relations -- Periodicals; Asia -- Commerce -- Periodicals; Asia -- Foreign economic relations -- Periodicals; Eurasia -- Commerce -- Periodicals; Eurasia -- Foreign economic relations -- Periodicals; 382.05
• DOI: 10.1080/1540496X.2016.1186010
• Languages: English
• ISSNs: 1540-496X

Abstract

ABSTRACT: A number of studies have shown that the variance risk premium (VRP), defined as the difference between risk-neutral and physical expected variances, has strong predictive power for the excess stock market return, and this predictability peaks at 3- to 6-month prediction horizons. However, little research presents empirical evidences for Chinese stock market due to the absence of option market. Under general equilibrium asset pricing framework, this article estimates time-varying VRP using the Chinese stock market data. We find that the estimated VRP predicts the excess Chinese stock market return, and this forecasting power is stronger at 4- and 5-month horizons, which is consistent with the findings of existing literature.